From the AFR:
The NSW Coalition government plans to take on almost all the financial risk of one of Australia’s biggest infrastructure projects, the $10 billion WestConnex toll road in Sydney, in a new approach likely to be adopted nationwide.
Treasurer Mike Baird will reveal in the state budget on Tuesday that the first stage of the highway will be funded by the NSW government. Once the number of cars using it is known, the government plans to borrow money to build the second stage and later sell the project. NSW has reverted to the traditional approach of funding motorways after several high-profile toll roads funded by public-private partnerships failed financially because of unrealistic traffic forecasts.
“Financial markets have changed significantly since the global financial crisis,” Mr Baird told The Australian Financial Review on Monday. “We have seen a marked reduction in both the amount of the private capital available and the level of risk the private sector is prepared to take.”
The decision is an admission there is little private sector appetite for the initial risk of toll roads because of uncertainty over how many motorists will use them. The private operators of Sydney’s Lane Cove and Cross City tunnels, Brisbane’s Clem Jones tunnel and Melbourne’s EastLink toll road ran into financial trouble because toll revenues were lower than expected.
So, it’s back to the future for infrastructure development with government funding it off balance sheet via public corporations with the aim of privatisation later. This may work for user pays infrastructure and is potentially an improvement on the Mac Bank pump and dump model.
But the devil will be in the detail. In theory the intention to privatise dangles a commercial rate of return in front of the public corporation pressuring it to neither gold plate the build nor bloat its cost structure. But that is only if the commercial rate of return is not guaranteed, as it is in NSW’s publicly owned utilities. That has led to the perverse outcome where the entity has incentive to gold plate everything in site. The kicker is that the moment demand takes a hit, the entity can immediately jack prices to offset the volume fall, building in inflation and poor productivity, especially when you need it least, as conditions weaken.
I’m not an infrastructure guru and we don’t have enough to go on here yet and I’m interested in the views of readers on this topic.
